Everything has its price

The global economy is in a deep crisis. To prevent worse from happening, central banks are cutting interest rates and providing sufficient liquidity, while governments are supporting the real economy with guarantees, loans and government investments. Both have worked extremely well so far.

Like everything in life, this has its price. The central banks provide for very low or negative interest rates. Not just now, but probably in the years to come. Corporate bond prices have lost any signalling effect as central banks subsidise the market by buying bonds. In addition, because of the central banks‘ boundless willingness to take risks, liquidity can easily work its way through the markets and lift bond and equity prices upwards.

In addition to the positive short-term effects, however, government measures also have medium and long-term consequences that become increasingly negative over time. On the one hand, there is likely to be a crowding-out effect. Through its market interventions, the state is forcing private providers out of the market. On the other hand, it will at least partially prevent a market shakeout of marginal suppliers. Together, these two factors will reduce the efficiency and innovative strength of national economies in the coming years. In addition, taxes and social security contributions are also likely to rise in the medium term.

The negative consequences could be mitigated if governments and central banks were to quickly return to their basic functions. Experience shows, however, that gains in power and influence are difficult to give up.

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